China GDP puts to rest worst fears over the economy

Will Oswald, Global Head of FICC Research at Standard Chartered, says Beijing has the tools to guide its economy to a soft landing.

China's better-than-expected first quarter gross domestic product (GDP) numbers have put to rest the worst fears of a hard landing, with economists forecasting a growth pickup over the coming months.

The world's second largest economy expanded 7.4 percent in the January to March period, slowing from 7.7 percent in the previous three months, but beating market expectations for growth of 7.3 percent.

"Growth did slow down, but it's not as bad as worst fears had suggested," Louis Kuijis, chief China economist at RBS told CNBC on Wednesday.

Keren Su | China Span | Getty Images

A sharp deterioration in economic data in recent months combined with signs of financial stress fueled heightened concerns about the stability of the mainland economy. In the past two months, China suffered its first-ever domestic bond default and has seen a series of small bankruptcies, prompting chatter that the country may experience its own "Lehman moment".

Last week, International Monetary Fund (IMF) Managing Director Christine Lagarde warned on the risk of a "hard landing" in China.

"We're at the bottom of the economic cycle, and things can only get better from here," said Dariusz Kowalczyk, senior economist & strategist, Asia ex-Japan at Credit Agricole.

Signs of rebalancing

Economists say policymakers will take comfort from the data as it reflects a rebalancing of the economy.

"While we see weakness present in heavy industry, the services sector is holding up better, giving the economy a bit of a cushion," said Kuijis.

"This will comfort them in their current approach of providing some support to growth without implementing major stimulus," said Kuijis, who forecasts full year growth to come in at 7.7 percent - above the government's 7.5 percent target.

Retail sales in China rose 12.2 percent in March from a year earlier compared with expectations for a 12.1 percent rise, while January-to-March fixed asset investment was up 17.6 percent from a year earlier versus market expectations for an 18.1 percent rise.

A floor to growth

Economists expect the mini-stimulus package unveiled earlier this month to arrest a slowdown in the economy will begin to boost economic activity as soon as this quarter.

The fiscal measures include tax breaks for small firms and plans to speed up some infrastructure spending, including the building of rail lines.